Explanation of the Advantages & Disadvantages of a Proprietorship

By Jeff Clements

The decision regarding how to structure a business is one of the first and most important decisions a business owner will make. Each separate form of business has its unique set of advantages and disadvantages, and the business owner must evaluate the relative pros and cons of each when deciding which form to choose.

Informal Business Structure

Sole proprietorships have several distinct advantages that make them a very popular form of small business. They are quick and easy to set up, typically requiring no state registration and hence no upfront state filing fees to get the business up and running. Also, sole proprietorships report income and expenses on the owner's individual tax return, making it cheaper and easier to file income taxes for the business.

Easy Management

Sole proprietorships are relatively easy to manage. The business owner doesn't have to comply with various state statutes and federal regulations on corporate governance and does not have to answer to partners, other shareholders or a corporate board of directors. This enables the owner to focus more on operations and less on red tape and bureaucracy of more formal organizations.

Ready to start your LLC? Start an LLC Online Now

Personal Liability

A sole proprietorship is not without its disadvantages for both the owner and the business. Since there is no other legal entity involved, sole proprietors are personally liable for outstanding business debts. This includes rental space, utilities, leased equipment, promotional agreements, and other business-related contractual obligations. Additionally, a sole proprietor is considered self-employed by the IRS and accordingly must pay self-employment taxes on his income. This is true to a lesser extent with alternate forms of business such as a corporation or a partnership.

Difficulty Obtaining Credit

Since many small businesses fail, a sole proprietor can have difficulty getting business credit without pledging personal assets or guaranteeing business loans personally. Also, as a self-employed individual, the owner can have a hard time proving income to the satisfaction of creditors. Preparing profit and loss statements, balance sheets, and proving bank deposits can be an onerous task for a sole proprietor seeking credit.

Limited Growth Opportunities

By definition, a sole proprietor can have only one owner and cannot bring on partners without changing the company's business structure. Since the business depends on only one owner for financial support and operations management, this may limit growth opportunities and increase the overall risk of the venture.

Ready to start your LLC? Start an LLC Online Now
Opportunities of Sole Proprietorships


Related articles

What Forms Do I Need to File for an S Corp?

An incorporated business is automatically designated by the Internal Revenue Service as a C corporation for income tax purposes. However, certain smaller corporations can elect to be taxed as S corporations without forfeiting the liability protections that the corporate structure affords to shareholders. Making the initial election requires filing an IRS form. Once S corporation status is granted, the tax forms the corporation must file annually will change.

Sole Proprietorship & Investment Accounts

The sole proprietorship is a very common form of small business, and beyond running their underlying business, sole proprietors are free to make investments and hold assets in investment accounts. These accounts can be used to augment savings for the business, to speculate on specific investment opportunities or to offset financial risks encountered in the sole proprietorship's business operations.

What Is the Difference Between a Solo Practice & a Sole Proprietorship?

Selecting the legal structure of a business is one of the first and most important decisions that a new business owner can make. It can dictate the number of owners in the business, the level of formality of the organization and has many important tax consequences. The simplest form of business is the sole proprietorship since it does not involve multiple owners, has simple tax treatment and does not require formal state filings prior to start-up like a corporation or limited liability company. Solo practices in various professions are not restricted to a specific form of business structure; the term solo practice simply indicates that there is a single professional in the practice.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

Similarities Between Sole Proprietorships and Partnerships

If you are interested in sending a message that you are willing to take personal responsibility for the success and ...

The Top Ten Risks in a Sole Proprietorship

A sole proprietorship is the most basic form of business -- where the owner is in business for himself as an individual ...

The Pros & Cons of a Sole Proprietorship & Corporation

Selecting the appropriate organizational type is one of the most important decisions you will make when starting your ...

What Does LLC Mean for a Company?

First authorized by laws passed in Wyoming in 1977, the limited liability company, or LLC, is a fairly recent ...

Browse by category
Ready to Begin? GET STARTED